The solution to the crisis: Tweaking bankers’ bonuses is not enough

01 October 2009

Article

The first anniversary of Lehman Brothers’ collapse and last week’s meeting of the G20 countries have provoked numerous reflections on the causes and possible solutions to the current financial and economic mess. The problem is that the majority of these deal with cosmetic rather than the profound changes needed to get the global economy back on track.

The first anniversary of Lehman Brothers’ collapse and last week’s meeting of the G20 countries have provoked numerous reflections on the causes and possible solutions to the current financial and economic mess. The problem is that the majority of these deal with cosmetic rather than the profound changes needed to get the global economy back on track.

Take the G20, for example. With President Obama replacing President Bush at its helm, some have hailed it as an important step towards a new order of global governance. This self-appointed grouping, however, is nothing more than a recycled G8 made up of mainly rich and powerful countries, with a few new partners which have become too big to be ignored. But what about the rest of the world?

The rest of the world is busy paying the price for the crisis caused by the crony capitalism in the countries of the global North. Guatemala, for instance, is already experiencing a severe food crisis which led its President Alvaro Colom last month to declare a “state of public calamity”. On the other side of the world, cotton farmers across Africa are struggling to make ends meet as their incomes are slashed to a quarter of what they had been before the crisis. And the list goes on.

The rest of the world – at least parts of it – is also busy finding genuine alternatives to the current system. The UN, the most representative institution we have to date, hosted the Conference on the World Economic and Financial Crisis earlier this year, creating a genuine space for all 192 countries, members of the UN General Assembly, to come up with real solutions to the global crisis. A commission of world experts led by Nobel prize-winning economist Joseph Stiglitz, of which I was the part, informed this G192 gathering on the impact of the crisis on the developing nations and possible solutions.

One of the conclusions of the commission was that the world urgently needed a new international monetary and financial order in which regional financial architectures were the key. How about thinking the unthinkable? How about replacing the International Monetary Fund (IMF) that has been behind the disastrous policy of enforced liberalisation including of the banking sector for several decades? Even if some developing countries are indeed granted more voting rights in the IMF, this will be yet another cosmetic change applied to a problem that needs a serious surgical operation.

That is why Latin America is already moving in the new direction with its two new initiatives, Banco del Sur (Bank of the South) and the Southern Monetary Fund. These two lending organisations are free from the unfair conditionalities usually attached to the loans provided by the International Monetary Fund (IMF). They are also committed to investing in more sustainable regional-based development.

The arrogance and arbitrary way with which the North has dealt with the South cannot continue. IMF is part of such unequal relationship. The Latin American regional initiative and other similar regional agreements can lay the basis not only for a new international financial architecture, but also for a new, more equitable world order.

The solution to the crisis is not only about tweaking bankers’ bonuses - or making small regulatory changes to the financial sector. It is certainly about putting the same notoriously unstable, unjust and environmentally unsustainable economic system back on track. This is a crisis which demands radical responses and changes to the current world order. The South is working on its own solutions and is ready to be heard. Is the North ready to listen?

Pedro Paez Perez is a former Minister for Economic Policy Coordination in Ecuador and currently the President of the Ecuadorian Presidential Commission for the New Regional Financial Architecture - Banco del Sur. He is also a Member of the UN High-level task force on the financial crisis led by Joseph Stiglitz.

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